Big banks’ profits fall as deal-making and mortgages slow
Four major banks on Thursday reported a notable fall in their first-quarter profits as volatile markets and the war in Ukraine caused business to dry up, while a slowdown in the housing market meant fewer people were looking for a new mortgage or loan sought refinancing.
Results from Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo were similar to results from JPMorgan Chase, which reported a double-digit drop in earnings on Wednesday.
At Goldman Sachs, profits fell 43 percent to $3.63 billion. Citigroup saw profits fall 47 percent to $4 billion, Wells Fargo profits fell 21 percent and Morgan Stanley profits fell 11 percent.
In a way, comparing this quarter to a year ago doesn’t tell you how well Wall Street is doing. The first quarter of 2021 was supported by the start of widespread vaccination campaigns against COVID-19 as well as the economic recovery from the pandemic. Banks have also released large chunks of their loan default reserves over the past year — money they’re putting away to cover potentially bad loans in a troubled economy. That was a one-time profit increase.
However, banks are often viewed as proxies for the broader economy and the first quarter of 2022 was significantly rougher than a year earlier. Markets struggled with high inflation and a surge in oil prices, largely driven by the Russian invasion of Ukraine. Interest rates have also risen sharply in response to the US Federal Reserve’s signaling that it plans to raise interest rates several times this year, which in turn has caused mortgage rates to rise.
Aside from the slowdown in business deals, the war in Ukraine and sweeping international sanctions on Russia weighed on the results of at least two banks, Citigroup and, to a lesser extent, Goldman Sachs. Citi said it needed to because of its exposure to Russia, where the bank has a retail banking business and operates a modest investment bank, are setting aside $1.9 billion in potential loan losses. Goldman Sachs CEO David Solomon said the bank suffered $300 million in Russia-related losses this quarter.
That’s on top of the $1.5 billion that JPMorgan set aside on Wednesday to cover higher inflation costs as well as its exposure to Russia.
But where banks really took a hit this quarter was in investment banking. Goldman Sachs said investment banking revenue fell 40 percent year-over-year, while Morgan Stanley reported a 38 percent drop in investment banking fees. Citigroup reported a 43 percent decline in investment banking revenues.
Much of the decline in investment banking revenues was related to companies sitting on the sidelines due to volatility during the quarter.
Wells Fargo, which has a smaller investment bank, was hit harder by the housing market slowdown. Wells’ mortgage origination revenue fell 33 percent from a year earlier. Freddie Mac said the average 30-year fixed-rate mortgage hit 5 percent last week, nearly double what it was less than a year ago.
“Rising interest rates caused a significant slowdown in mortgage banking, particularly in refinancing activity,” Kyle Sanders, an analyst at Edward Jones who covers Wells Fargo, said in an email.